Markets live chat transcript for the chat ending at 12:18 on 17 Apr 2009. Participants in this chat were: Neil Hume, FT (NH) Bryce Elder (BE)
NH:
Hola
NH:
Good morning and welcome to Markets Live
NH:
FT Alphaville’s markets discussion
NH:
as I am sure you know by now
NH:
Murphy not here
NH:
in NY
NH:
but we have had contact
NH:
and he wants to urge u all to vote for us against the Beardy One in the Webbys
NH:
he also had something to say about that Evening Standard comment on blogs yesterday
NH:
for those of you who missed it
NH:
and here is Murph’s take
NH:
Can’t buy publicity like that. Brilliant back foot compliment! Seriously.
I’m told early weeby votes are a tussle between us and branson. That’s also great pub. And a challenge.
I’m told early weeby votes are a tussle between us and branson. That’s also great pub. And a challenge.
BE:
Morning all
BE:
how was the Winterfloods bash last night?
NH:
oh, very amusing
NH:
School Reunion theme
NH:
and you can imagine what that entailed
BE:
Err … yes.
BE:
I heard there was a Britney Spears tribute
NH:
you are very well informed
NH:
yes, and the ladies appeared way above the main drinks area
NH:
on a sort of flat roof
NH:
all looked quite dangerous
NH:
but amusing
BE:
I can imagine
BE:
any good gossip?
NH:
I picked up a few bits
NH:
apparently a chunky cash call coming in the UK
NH:
and I also picked up that Zurich Financial were going to raise EUR1.1bn in a share placing
NH:
and that has been announced this morning
BE:
It has, to help pay for the acquisition of that AIG business
11:08AM
NH:
right, let’s move on to the wider market
BE:
a bit like yesterday
BE:
market on hold ahead of some earnings releases
BE:
FTSE 100 ahead 13 4,066
BE:
which way it goes after that, who knows
NH:
so we have got figs from Citi and GE today
BE:
that’s right
BE:
trying to get some consensus figs at the moment
BE:
in the meantime, here’s some comment from Deutsche Bank
BE:
The Friday before the two week peak season for US earnings is usually marked by GE’s results. So today sets the scene for the avalanche of earnings over the next
fortnight. Interestingly GE’s share price has moved by 10-13% (up and down) on 3
of the last 4 quarterly earnings release days. From Q1 to Q4 2008 we’ve seen -
12.79%, +0.07%, +13.10% and -10.76% on earnings day. On the same day the
S&P 500 was down around 1-2% on the first 3 of these days and on the fourth it
was up around 0.5%.
BE:
We also have Citigroup report today which will move us away from the relative
winners (e.g. Goldmans and JP Morgan) to the more challenged financials. Indeed
Monday sees Bank of America’s earnings release. In reality we are probably in a
holding pattern until the stress tests results are released on May 4th (date
announced yesterday), with some of the methodology seemingly announced a
week today. A reminder that the initial base case scenario for the tests was a -2%
GDP contraction in 2009 and a +2.1% GDP growth for 2010 with unemployment
at 8.4% and 8.8% respectively. The more adverse scenario was -3.3% and +0.5%
GDP, and 8.9% and 10.3% unemployment for 2009 and 2010 respectively.
BE:
With this in mind if the stress tests are conducted on this basis then the
uncertainty could still remain after, even if all/most pass the tests. The problem is
that the adverse scenario is now not that far away from many people’s base case
scenario, even with the recent better run of data. This doesn’t really make it a
stress test. So it’s going to be interesting to see if anything changes ahead of the
methodology being released
NH:
thanks for that
NH:
Interesting stuff on the stress test
NH:
or non stress test
NH:
not quite up there with the FSA’s stress test is it?
BE:
no
BE:
I think that was for a 16% drop in GDP
NH:
right I have some consensus figs for Citi
NH:
oh and GE
NH:
here they are
NH:
GE first
NH:
Q1 pre US open 9conf call 13.30 uk time)
Sales $39bn
EPS $0.21
NH:
and Citi
NH:
11.30 uk time (conf call 13.30 uk time)
Sales $21.94bn
EPS $0.34
BE:
So we should get Citi while on air
NH:
yep, will set up some alerts for that
BE:
Might be lively
NH:
(and Dre, good pick up. We have had a little difficulty with that letter this morning!)
11:12AM
BE:
right, we should have a look at BT
BE:
biggest riser in the FTSE 100 at the moment
BE:
shares up 6.9p to 96.7p
BE:
Gain of 8%
NH:
hmmm
NH:
I had assumed this rise was down to Norma’s pension story in the paper
NH:
which said
NH:
the pensions regulator is prepared to be flexible with company’s with large pension fund deficits
NH:
instead of having to make a good a shortfall over 10 years
NH:
they could be allowed to do it over 20-years
NH:
and use property to make good the shortfall
BE:
so you could lob the BT Tower into the fund
NH:
yeah, that sort of thing
NH:
David Norgrove is the pensions regulatory
NH:
and formerly of M&S
NH:
here’s Norma’s piece
NH:
and a link to it
NH:
Pension watchdog to give employers leeway on schemes
By Norma Cohen in London
By Norma Cohen in London
Employers with solid businesses will be allowed to renegotiate recovery plans in order to repair yawning deficits that have opened up in their pension schemes since the financial crisis began, the Pensions Regulator will announce on Friday.
The regulator is to unveil a revised corporate plan for itself covering the years 2009 through to 2012 that has been rewritten to take account of the severe recession and the challenges it has created for employers who need to fund a deficit now estimated at more than £250bn.
NH:
Defined benefit pension schemes have been hit hard by an economy undergoing collapsing stock markets and falling interest rates.
These have widened the gap between the value of their assets and that of their liabilities, sparking fears that companies will have to divert even more of their scarce cash flow away from their core business and into their retirement schemes in order to fill deficits on time.
Fears about pension contributions have also weighed on the share prices of some of the UK’s largest employers with big pension shortfalls.
These have widened the gap between the value of their assets and that of their liabilities, sparking fears that companies will have to divert even more of their scarce cash flow away from their core business and into their retirement schemes in order to fill deficits on time.
Fears about pension contributions have also weighed on the share prices of some of the UK’s largest employers with big pension shortfalls.
NH:
so that should all be good for BT
BE:
yep
BE:
but there could be another explanation for the rise
NH:
go on
BE:
have a look at this
BE:
went up this morning on Mergermarket, our stablemate
NH:
(Dre, no offence taken)
BE:
UK-listed telecoms group BT is planning to issue a multi-billion pound bond programme to address its GBP 11bn (EUR 12.4bn) debt and pension deficit, said a source close to the company. He said he understood investment banks Goldman Sachs and Citi have been advising BT on its preparations and would take lead roles should the issuance go ahead.
A sector banker said there is currently “massive interest” in telcos from bond investors after a GBP 700m bond was launched by Deutsche Telecom earlier this month and Swisscom issued a SFR 1.25bn bond last month.
BE:
The banker said a logical option for BT would look to raise long bonds in order to address the pension scheme deficit that is likely to be revealed to be as much as GBP 10bn next month. “They’ll want to look at long bonds with maturities of five, 10 and 30 years,” he said. A BT spokesperson said: “It’s always been our strategy to reduce debt when the opportunity arises.” The five year CDS spread for BT is currently at around 235bps, compared to around 66bps a year ago, suggesting a window for entering the bond market may soon slip away.
BE:
A market source had also heard BT may be planning to raise up to GBP 8bn in the bond market. “BT is thinking of dealing with all of their problems in one go,” he said.
BE:
BT’s triennial pension review is expected to reveal the deficit has risen sharply from the last shortfall of GBP 3.4bn measured at 31 December 2005. Last year, BT made a contribution of GBP 626m into the fund and recent reports suggest BT may be required to pay at least GBP 750m a year into the fund, as a result of a higher deficit. A further concern could be if the Pension Regulator steps in to demand additional pension payments should the deficit be at the higher end of expectations. A second source close to the company said: “The Pensions Regulator is under pressure because everybody’s pension deficit is up. You could imagine they could become more hawkish in this situation.” A spokesperson for the Pension Regulator said: “If it is a very large deficit we would look for a recovery plan from the company.”
BE:
Robin Ellison, a pension lawyer at Pinsent Masons, said: “The Regulator takes a pragmatic approach and will not drive a company into insolvency and lose jobs just because of pension contributions. Usually they encourage trustees to look at other options such as take a charge over some property.”
BE:
BT may reduce its net debt/EBITDA ratio from 3.4x to 3.0x in order to ensure it does not have its credit rating reduced further. Last week, credit rating agency Fitch downgraded BT from BBB+ to BBB on concerns that the core underlying growth drivers for BT, namely Global Services and UK broadband, have reached an inflection point and are no longer able to provide sufficient cash flow growth. As a result, Fitch expected net leverage at year end March 2009 to be as much as 2.4x. Last month, Standard & Poor’s reduced its rating on BT from BBB+ to BBB with a stable outlook, and Moody’s cut its BT rating from Baa1 to Baa2 with negative outlook. More downgrades could result in more expensive borrowing – especially when the company has to address a GBP 1.5bn loan maturing in December 2010 as well as a GBP 200m loan maturing in August this year. A reduction in BT’s rating would cause additional interest from the next coupon period at a rate of 0.25 percentage points for each ratings category adjustment by each rating agency, said the agencies.
BE:
S&P credit analyst Michael O’Brien said he expected the deleveraging impact on BT of reducing its ratio of adjusted debt to EBITDA to 3.0x from the current 3.4x would be about GBP 2.2bn. The telecoms group can draw on GBP 2.3bn, consisting of a GBP 1.5bn undrawn facility backing up its commercial paper program and another facility of GBP 800m. In addition, BT had cash of GBP 792m and investments of GBP 837m on 31 December 2008. O’Brien said BT has a number of options to preserve its intermediate financial risk profile before it weakens further, including the potential to modify dividends or to defer – or reduce – capital expenditure as it sees fit. Full year results will be announced on 14 May. But he added; “If these don’t work out, it will put more pressure on the outlook. If the economic outlook remains negative it would give them limited scope to deliver.”
BE:
At the same time, BT is expected to announce a major round of redundancies in its troubled Global Services unit, as this news service wrote in February and was followed up in other reports last weekend. The redundancy programme will be along the lines of the 10,000 job cuts made by the group earlier this year. The group is also expected to announce a writedown of GBP 300m on the Global Services arm, on top of a Q3 writedown of GBP 336m on the unit last year.
BE:
The problems affecting the group are perceived as limiting BT Chief Executive Officer Ian Livingston’s options to address the pension and debt issues. The second source said: “These problems are considered home-grown issues that are not to do with the economic situation. Shareholders will make him partially responsible.” The source said this would make a rights issue unlikely: “A large rights issue would be pretty disastrous for the company. It would cause a lot of upset for shareholders.”
BE:
BT, the market source suggested, may have looked at a split but added this was unlikely because it would undermine inherent advantages the company has over its competitors. He said: “The company has always been against this,” but added that Livingston could take advantage of the Pension Regulator “seen to be forcing his hand.” A second industry banker said: “The pension trustees would never allow the company to get away with it.” A third industry banker said: “It’s not the kind of thing Ian Livingston would do.”
NH:
crikey, that’s very detailed
NH:
and look at the author
NH:
one Lawrie Holmes
NH:
former biz editor at the Sunday Express
BE:
yeah, nice bloke
NH:
didn’t realise he had moved to MM
NH:
suppose we could call him a colleague
NH:
given we are all under the Pearson umbrella
Pearson plc is the parent company of the Financial Times, publisher of FT Alphaville.
NH:
So when at the BT results due?
BE:
May 14 I believe
NH:
Ta, will put that in the diary
11:18AM
NH:
Right, just going back to pension report, which as G Cox noted is out today
NH:
here’s the executive summary
NH:
certainly worth delving into when we have a minute
NH:
is it having any affect on the other companies with big pension fund deficits?
Invensys (ISYS:LSE): Last: 168.50, up 3.2 (+1.94%), High: 170.80, Low: 166.20, Volume: 1.34m
British Airways (BAY:LSE): Last: 169.80, up 8.9 (+5.53%), High: 171.20, Low: 161.90, Volume: 3.82m
Smiths Group (SMIN:LSE): Last: 705.50, up 11.5 (+1.66%), High: 711.00, Low: 691.50, Volume: 524.44k
Whitbread (WTB:LSE): Last: 861.00, up 1.5 (+0.17%), High: 877.50, Low: 857.00, Volume: 655.59k
NH:
hmmm
NH:
some pretty good moves
NH:
right here’s the pension stuff
NH:
Today we are faced with a period of intense financial instability which has had a profound impact on occupational pension schemes in the UK.
We are operating in an economic climate far removed from the context in which we began in April 2005 and have reviewed our plans for 2009-2012 accordingly.
Scheme governance, mitigating Defined Benefit (DB) risks and mitigating Defined Contribution (DC) risks remain at the core of our activities. Throughout these key focus areas we will remain sensitive to the severe pressures employers, trustees and members currently face.
All through this Corporate plan runs the theme of good governance, which is more, not less, important during the downturn.
We are operating in an economic climate far removed from the context in which we began in April 2005 and have reviewed our plans for 2009-2012 accordingly.
Scheme governance, mitigating Defined Benefit (DB) risks and mitigating Defined Contribution (DC) risks remain at the core of our activities. Throughout these key focus areas we will remain sensitive to the severe pressures employers, trustees and members currently face.
All through this Corporate plan runs the theme of good governance, which is more, not less, important during the downturn.
NH:
For those managing DB schemes, we have endeavoured to reassure the regulated community that the scheme funding regime has sufficient flexibility to cope with the impact of the downturn. In explaining the position of trustees of a scheme in deficit being akin to an unsecured creditor, we have set out the option to renegotiate recovery plans to repair scheme deficits, making clear that the best support for a pension scheme is a viable employer.
For those managing DC schemes, we have reminded trustees they should have clear and appropriate processes for members approaching retirement, and should encourage review of investments, contributions and target retirement dates. We look forward to our first publication of the DC trust-based landscape this summer.
We will continue to encourage open dialogue between employers and trustees. We will monitor the situation. We continue to help educate our regulated community as we explain new risks in the downturn, and we will always emphasise the long-term nature of pension promises.
Ultimately our goals remain the same – to protect members’ benefits, to reduce risks to the Pension Protection Fund (PPF), and to promote best practice.
We can best achieve our goals for the long term when we enable and educate through positive dialogue, with the power to enforce as an important but last resort. We will continue to endeavour to work efficiently and in partnership with the regulated community, Government and our key stakeholders both at home and abroad.
For those managing DC schemes, we have reminded trustees they should have clear and appropriate processes for members approaching retirement, and should encourage review of investments, contributions and target retirement dates. We look forward to our first publication of the DC trust-based landscape this summer.
We will continue to encourage open dialogue between employers and trustees. We will monitor the situation. We continue to help educate our regulated community as we explain new risks in the downturn, and we will always emphasise the long-term nature of pension promises.
Ultimately our goals remain the same – to protect members’ benefits, to reduce risks to the Pension Protection Fund (PPF), and to promote best practice.
We can best achieve our goals for the long term when we enable and educate through positive dialogue, with the power to enforce as an important but last resort. We will continue to endeavour to work efficiently and in partnership with the regulated community, Government and our key stakeholders both at home and abroad.
NH:
In addition to the challenges brought on by the current financial instability, we face profound changes in the UK pensions landscape. The 2007 and 2008 Pensions Acts seek to transform the UK pensions landscape. Within the Enabling Retirement Saving Programme (ERSP), we welcome and will deliver the capability needed to support our new role in relation to employer compliance. We will deepen our understanding of the impact of these significant changes to the pensions environment, working closely with both the provider and business communities. Our aim is to make it as easy as possible for employers to comply with the new duties from 2012.
Finally we recognise that UK schemes do not operate in isolation and we will continue to represent the UK in European debate, remaining positively engaged on key regulatory issues. We aim to ensure our particular regulatory approach is understood and aligned appropriately to that of our domestic and international partners.
Finally we recognise that UK schemes do not operate in isolation and we will continue to represent the UK in European debate, remaining positively engaged on key regulatory issues. We aim to ensure our particular regulatory approach is understood and aligned appropriately to that of our domestic and international partners.
NH:
for more
NH:
go to
11:21AM
BE:
Where now?
NH:
what about Pace
NH:
not Pace Mirco anymore
NH:
just Pace
BE:
Pace macro
NH:
set top box maker
NH:
shares have been on fire recently
NH:
after a string of decent trading updates
BE:
yep, those high def boxes and PVRs seemingly flying off the shelves
NH:
anyway, this morning Philips
NH:
that’s the Dutch electronics company
NH:
decided to take advantage of the recent strong run
NH:
shares started the year at 53p
NH:
they are now at 150p
BE:
Wow
NH:
anyway Philips has decided to slot its holding
NH:
JPMorgan doing the biz for the Dutch
BE:
right
BE:
but explain this to me
BE:
why are the shares up
Pace (PIC:LSE): Last: 151.00, up 11 (+7.86%), High: 153.25, Low: 136.00, Volume: 104.02m
BE:
so how does this work?
BE:
huge chunk of stock comes on the market
BE:
to be placed
BE:
and Pace shares rise
NH:
well, perhaps there is relief a potential overhang has been cleared
NH:
and the stock is now more liquid
NH:
and therefore more appealing to institutions
BE:
that sounds like the standard 
line
lineNH:
I suppsoe it does
NH:
perhaps Pace are now a takeover target
BE:
Hm
NH:
but there is also a rumour doing the rounds
NH:
that BSkyB might have picked up a large chunk of the stock on offer
BE:
really?
BE:
Does that make sense?
NH:
not sure
NH:
and after Sky’s experience of ITV, you would think they would be wary about buying a big lump of another of a quoted company
NH:
especially one that has had the sort of run Pace has
NH:
so I think we can file this one under a 10 bandit rating
BE:
And Sky already paid £125m for Amstrad
NH:
still, amazing the placing has gone so well
BE:
In fact the wires are saying that is deffo not the case
BE:
“sources” telling them it was placed with institutions at 135p
BE:
some of whom I am hearing are already flipping the stock
NH:
I bet they are
NH:
15p turn
NH:
a nice morning’s work
BE:
here’s a Dow Jones Wire snap
BE:
A person familiar with the matter told Dow Jones Newswires the shares were
placed with both new and existing shareholders at an average price of 135 pence
a share. The buyers were predominantly long-only U.K. investors, this person
said.
Philips acquired the shares following the sale of its set-top box connectivity
business to Paceon April 21, 2008. It said Friday the sale is in line with its
strategy to dispose of non-core shareholdings.
BE:
Pace has agreed to waive a lockup undertaking given by Philips in relation to
the shares, JP Morgan Cazenove said, which was due to expire later this month.
NH:
(fairpoint Taxloss, paper loss on holding could be considered good value.)
NH:
any comment around on Pace??
BE:
Not that I’ve seen
BE:
Not since the trading statement, basically
NH:
which was stunning, no?
BE:
Exactly the word used by Noble …
BE:
Both the timing and magnitude of the latest upgrade was stunning. This was largely driven by better margins on the acquired Philips’ STB business. Pace has confounded our concerns on its ability to combat pricing pressure and maintain margins in a maturing market. With further upgrades likely, the rating is undemanding for a business with a strong competitive position, cash generation and balance sheet.
BE:
Hot on the heels of 75-80% upgrade to FY09 EPS at its 3 March prelims, on 7 April Pace once again announced a “very significant upgrade”. Its shares soared 45% on the back of a further 75-80% upgrade to FY09 EPS estimates. Management highlighted two reasons for the upgrade – 1) Orders from new and existing customers: We increase our FY09 and FY10 revenue estimates by c.15% and c.20% respectively and 2) Margin upgrades: The larger scale of the combined Pace and the Philips STB business enabled Pace to secure better pricing from its suppliers. In addition, cost savings from the integration of Philips’ STB business also contributed to the upgrades. As a result, we increase our FY09 and FY10 EBITA margins from 4.4% and 5.4% to 6.7% and 7.7% respectively.
Overall, we upgrade our FY09 and FY10 EPS estimates by c.76% and c.73% respectively. It is worth noting that c.85% of the upgrades were driven by elevated margin expectations.
Overall, we upgrade our FY09 and FY10 EPS estimates by c.76% and c.73% respectively. It is worth noting that c.85% of the upgrades were driven by elevated margin expectations.
BE:
Pace has now increased its FY09 gross margin expectations by 100 bps to 17.5%. However, there remains scope for further outperformance. A key rationale for acquiring the Philips STB business was to increase its gross margins from 14% in FY07 to core-Pace’s FY07 gross margins of 20%. Indeed in less than 18 months, through introducing cost-reduced versions of STBs and operational improvements, core-Pace’s gross margins had increased from 15% in May 2006 to 20% by December 2007. The Philips STB business was acquired in April 2008 and with the integration proving to be a success, the current gross margin guidance of 17.5% is conservative. Our sensitivity analysis shows that at the current revenue guidance, 100bps of outperformance on gross margins will result in another 15% upgrade to PBT (see table 2). A gross margin of 18.5% is still achievable as it implies EBITA margins of c.7.5%, comfortably below management’s medium term target of 10%.
BE:
VALUATION: SENTIMENT DRIVEN BY EARNINGS UPGRADES
Pace’s ability to grow market share and increase margin primarily through the Philips STB acquisition has confounded our erstwhile concerns on its ability to combat pricing pressure and maintain margins in a maturing market. We have reappraised our fundamental stance and acknowledge that Pace is a top three global player that is highly cash generative with a strong balance sheet (FY08 net cash of £38m). As the scope for further margin-led upgrades continues to drive sentiment, we turn Positive. Post the significant upgrades on consensus estimates Pace trades at an undemanding cash adjusted FY09 P/E of c.7x (using FY08 net cash of £38m) and c.6x (using FY09E net cash of £84m). Our valuation of 195p, represents 38% upside and implies a cash adjusted P/E of c.9x using FY09 net cash. In addition, the lockup on Philips’ 17% stake expires at the end of April providing investors an opportunity to gain exposure to this stock through any upcoming placing. Pace will issue a combined IMS and AGM statement on 22 April.
Pace’s ability to grow market share and increase margin primarily through the Philips STB acquisition has confounded our erstwhile concerns on its ability to combat pricing pressure and maintain margins in a maturing market. We have reappraised our fundamental stance and acknowledge that Pace is a top three global player that is highly cash generative with a strong balance sheet (FY08 net cash of £38m). As the scope for further margin-led upgrades continues to drive sentiment, we turn Positive. Post the significant upgrades on consensus estimates Pace trades at an undemanding cash adjusted FY09 P/E of c.7x (using FY08 net cash of £38m) and c.6x (using FY09E net cash of £84m). Our valuation of 195p, represents 38% upside and implies a cash adjusted P/E of c.9x using FY09 net cash. In addition, the lockup on Philips’ 17% stake expires at the end of April providing investors an opportunity to gain exposure to this stock through any upcoming placing. Pace will issue a combined IMS and AGM statement on 22 April.
NH:
right, we are braced for the Citi numbers.
11:30AM
NH:
Citiwatch
NH:
looking for the statement
BE:
GE q1 eps 26c vs 21c forecast
NH:
loss does not look as bad as expected
BE:
Citi Q1 loss 18c per share
NH:
here’s the press release
NH:
sorry wrong one
BE:
GE Q1 backlog $171bn!
NH:
any market reaction to this
BE:
FTSE up 33 at 4086
NH:
Monkey – you must have better data than us. and stil not up on the company website
NH:
New York, NY, April 17, 2009 — Citigroup Inc. (NYSE: C) today reported net income for the first quarter of 2009 of $1.6 billion and a loss per share of $0.18, based on 5,385 million shares outstanding. Revenues of $24.8 billion were driven by strong results in the Institutional Clients Group, partially offset by net write-downs. Results also include $7.3 billion in net credit losses and a $2.7 billion net loan loss reserve build.
The $0.18 loss per share reflected the reset in January 2009 of the conversion price of the $12.5 billion convertible preferred stock issued in a private offering in January 2008. This did not have an impact on net income but resulted in a reduction to income available to common shareholders of $1.3 billion or $0.24 per share. Without this reduction, earnings per share were positive. The loss per share also reflected preferred stock dividends, which did not impact net income but reduced income available to common shareholders by $1.3 billion.
NH:
Key Items
* Total revenues of $24.8 billion were up 99% compared to the first quarter of 2008, with sequential improvement across all regions.
* Net interest margin of 3.30% increased 50 and 8 basis points versus the first and fourth quarter 2008, respectively.
* Operating expenses were down $3.7 billion, or 23%, since the first quarter 2008.
* Headcount reduced by approximately 13,000 since the fourth quarter 2008 to 309,000 and approximately 65,000 since peak levels.
* Tier 1 capital ratio was approximately 11.8% versus 7.7% in the first quarter 2008.
* Deposit base remained relatively stable at $763 billion compared to the fourth quarter 2008, despite the challenging environment. Deposits declined 8% since the first quarter 2008, due to the sale of the German retail banking operations and the impact of foreign exchange. U.S. deposits increased $8 billion sequentially and $28 billion year-over-year.
* Closed sale of remaining Redecard position for an after-tax gain of $704 million.
NH:
Management Comment
“Our results this quarter reflect the strength of Citi’s franchise and we are pleased with our performance. With revenues of nearly $25 billion and net income of $1.6 billion, we had our best overall quarter since the second quarter of 2007,” said Vikram Pandit, Chief Executive Officer of Citi.
“The clear message from this quarter is that our clients remain engaged. Citi is a unique franchise in global financial services. We offer more services in more places around the globe than anyone, which our clients have long recognized. Despite the challenges we have faced this past year, they remain closely engaged with us.
“As strong as our franchise is, we have been taking steps to strengthen it further. We have lowered risk and dramatically reduced the problem legacy assets that have caused many of our losses. We have meaningfully lowered expenses and headcount and improved efficiency. We have also increased our capital base.
“Additionally, we continued to extend significant amounts of credit to U.S. consumers and continued to focus on supporting the U.S. housing market. Since October 2008, we successfully worked with borrowers, with combined mortgages totaling approximately $13.5 billion, to avoid potential foreclosure and were able to keep more than 9 out of 10 distressed borrowers with Citi mortgages we own in their homes. Also since October 2008, our U.S. Cards business has worked with over 820,000 consumers to help them manage their credit card debt through a variety of forbearance programs.
BE:
And for GE …
11:36AM
NH:
OK, so what else is moving this morning?
BE:
oh, quite a bit of stuff
BE:
but no real stories to speak of
BE:
most things moving on the back of broker upgrades and downgrades
BE:
property stocks – more take profit advice from one of the big houses
BE:
MOST pushing Rentokil
BE:
and pushing some oilfield services stock in a big sector review
BE:
Caz saying take profits in Compass
BE:
biggest faller in the FTSE 100
BE:
plenty of stuff on the banks
BE:
including a James Eden downgrade of the banks
NH:
OK, so a veritable smorgaasboard to choose from
NH:
where shall we start.
NH:
shall we have a quick look at Eden
NH:
he is telling clients to book profits in Lloyds, I think
BE:
Hold on – just get the note
NH:
I have it
NH:
and I note a few people below asking what to do with their Lloyds
NH:
Lloyds’ T2 gains below our expectations; downgrade to Underperform
Lloyds has rallied strongly – up 123% since 5 March, but with the stock now trading at
1.0x 2010e tNAV we see its recovery as overdone. Yesterday it announced the
results of Phase 2 of its GBP7.3bn tier 2 discounted exchange offer. Phase 1 will, we
estimate, crystallise a GBP0.9bn pre-tax gain whereas in Phase 2, investor demand
was largely limited to the issues offering a more generous 80% exchange ratio –
generating a gain of, we estimate, less than GBP0.3bn. In aggregate, a modest 30bps
uplift to core tier 1 capital. To be clear, we welcomed this opportunist transaction, but
the elevated valuation now appears to ignore the dire outlook for UK impairments
which triggered Lloyds’ expensive embrace of the Asset Protection Scheme in March.
Lloyds has rallied strongly – up 123% since 5 March, but with the stock now trading at
1.0x 2010e tNAV we see its recovery as overdone. Yesterday it announced the
results of Phase 2 of its GBP7.3bn tier 2 discounted exchange offer. Phase 1 will, we
estimate, crystallise a GBP0.9bn pre-tax gain whereas in Phase 2, investor demand
was largely limited to the issues offering a more generous 80% exchange ratio –
generating a gain of, we estimate, less than GBP0.3bn. In aggregate, a modest 30bps
uplift to core tier 1 capital. To be clear, we welcomed this opportunist transaction, but
the elevated valuation now appears to ignore the dire outlook for UK impairments
which triggered Lloyds’ expensive embrace of the Asset Protection Scheme in March.
NH:
RBS set for GBP4.5bn exchange gain but challenged outlook ; TP cut to 25p
Based on the “Early Acceptances” reported under RBS’ tier 1/tier 2 tender/exchange
offers, we expect it to recognise a gain of at least GBP4.5bn, with an uplift to core tier
1 capital of >100bps. Despite this, we forecast an attributable loss of GBP11.4bn in
2009e and GBP6.3bn in 2010e, taking tNAV down to 26p in 2010e. We cut our target
price to 25p – even with a distant future uplift from conversion of (up to) GBP25.5bn B
Shares at 50p, we see little rationale for the stock to trade above 1.0x 2010e tNAV.
Based on the “Early Acceptances” reported under RBS’ tier 1/tier 2 tender/exchange
offers, we expect it to recognise a gain of at least GBP4.5bn, with an uplift to core tier
1 capital of >100bps. Despite this, we forecast an attributable loss of GBP11.4bn in
2009e and GBP6.3bn in 2010e, taking tNAV down to 26p in 2010e. We cut our target
price to 25p – even with a distant future uplift from conversion of (up to) GBP25.5bn B
Shares at 50p, we see little rationale for the stock to trade above 1.0x 2010e tNAV.
NH:
iShares disposal should cement Barclays’ resilience ; TP raised to 215p
Although arguably lower than originally mooted, we regard the price achieved for the
sale of iShares as outstanding. We now forecast a token Q3 2009e dividend (in line
with guidance), and see Barclays’ 2009e tNAV at 267p. Even if the incremental hit
from monoline exposures exceeds our base-case expectations, we see a valuation of
0.8x 2009e tNAV as undemanding. Moreover we regard the capital position as solid,
with a trough equity tier 1 of 5.9% in 2010e even without further uplift from asset
disposals and/or a tier 2 exchange. Barclays remains attractive vs UK domestic peers.
Although arguably lower than originally mooted, we regard the price achieved for the
sale of iShares as outstanding. We now forecast a token Q3 2009e dividend (in line
with guidance), and see Barclays’ 2009e tNAV at 267p. Even if the incremental hit
from monoline exposures exceeds our base-case expectations, we see a valuation of
0.8x 2009e tNAV as undemanding. Moreover we regard the capital position as solid,
with a trough equity tier 1 of 5.9% in 2010e even without further uplift from asset
disposals and/or a tier 2 exchange. Barclays remains attractive vs UK domestic peers.
BE:
Actually – Eden’s name’s not on it
BE:
Credited to Ian Gordon
NH:
Ok, thanks. here’s some more on Lloyds from Mr Gordon
NH:
Until the market receives greater clarity over the precise composition of Lloyds’ assets
to be included within the asset protection scheme – which may still be two months
away – earnings forecasts will remain highly uncertain. Exposures including the group’s
GBP13bn UK credit card portfolio and at least part of its GBP7bn notional monoline
exposure will remain unprotected, sitting outside the scheme. In any event, with a
GBP25bn first loss piece, all, or substantially all, impairments incurred in 2009/10 are
likely to remain entirely for Lloyds’ own account, which we expect to lead to substantial
attributable losses totalling in excess of GBP9bn over the next two years.
to be included within the asset protection scheme – which may still be two months
away – earnings forecasts will remain highly uncertain. Exposures including the group’s
GBP13bn UK credit card portfolio and at least part of its GBP7bn notional monoline
exposure will remain unprotected, sitting outside the scheme. In any event, with a
GBP25bn first loss piece, all, or substantially all, impairments incurred in 2009/10 are
likely to remain entirely for Lloyds’ own account, which we expect to lead to substantial
attributable losses totalling in excess of GBP9bn over the next two years.
NH:
Ignoring the future conversion of GBP15.6bn B Shares (at 115p), we estimate the
2010e tNAV at 88p, and despite our expectation of above-target synergy benefits in
2011e and beyond we see little support for the stock continuing to trade on 1.0x 2010e
tNAV. However, the likelihood of a lower level of state ownership than appeared likely
in early March, and an opportunist pre-tax gain of c.GBP1.2bn through its GBP7.5bn
tier 2 debt exchange have positively impacted sentiment.
2010e tNAV at 88p, and despite our expectation of above-target synergy benefits in
2011e and beyond we see little support for the stock continuing to trade on 1.0x 2010e
tNAV. However, the likelihood of a lower level of state ownership than appeared likely
in early March, and an opportunist pre-tax gain of c.GBP1.2bn through its GBP7.5bn
tier 2 debt exchange have positively impacted sentiment.
BE:
Thanks.
NH:
on the flip side
NH:
Good note out of Caz this morning on the banks and the read across from the JPM results yesterday
BE:
Let me guess – good news for Barc?
NH:
got it in one
NH:
here’s the comment
NH:
UK banks – Implications of US banking trends
The trends reported for Q1 by US banks this week are relevant for the UK banks with direct US exposure and investment banking operations. Key points:
In general terms, better than expected investment banking profits have enabled banks to absorb higher impairment charges or provision increases in commercial banking activities.
Investment banking revenues and profits were driven by record fixed income revenues. Credit market write-downs were lower than in preceding quarters, though impairment charges increased.
Consumer credit quality continues to deteriorate with higher delinquencies and charge-offs. Expectations have worsened for credit cards and prime mortgages though are unchanged for sub-prime mortgages.
Retail and commercial deposit margins declined QoQ.
The trends reported for Q1 by US banks this week are relevant for the UK banks with direct US exposure and investment banking operations. Key points:
In general terms, better than expected investment banking profits have enabled banks to absorb higher impairment charges or provision increases in commercial banking activities.
Investment banking revenues and profits were driven by record fixed income revenues. Credit market write-downs were lower than in preceding quarters, though impairment charges increased.
Consumer credit quality continues to deteriorate with higher delinquencies and charge-offs. Expectations have worsened for credit cards and prime mortgages though are unchanged for sub-prime mortgages.
Retail and commercial deposit margins declined QoQ.
NH:
If investment banking trends continue, then the potential earnings benefit is, in our view, greatest at Barclays where better trading at Bar Cap in 2009E could more than offset higher impairment on the US credit card book. The implications for HSBC are more balanced, with some risk to HSBC Finance estimates from higher card losses, and less sensitivity at the group level to stronger capital markets revenues. At RBS, we believe there is downside risk to impairment estimates at Citizens, and yet the ability to participate in buoyant fixed income markets may be constrained by government ownership and the need to husband capital.
In our view the respective valuations (2009E P/NTAV: Barclays 0.87x, RBS 0.65x, HSBC 1.47x) reflect more than just the near term earnings outlook, yet if the sector rally continues to focus on earnings momentum, and particularly the more favourable capital markets environment, then Barclays stands to benefit the most.
Barclays (BARC LN BARC.L, 203p, In-line)
In our view the respective valuations (2009E P/NTAV: Barclays 0.87x, RBS 0.65x, HSBC 1.47x) reflect more than just the near term earnings outlook, yet if the sector rally continues to focus on earnings momentum, and particularly the more favourable capital markets environment, then Barclays stands to benefit the most.
Barclays (BARC LN BARC.L, 203p, In-line)
NH:
Barclays (BARC LN BARC.L, 203p, In-line)
Barclays Capital will benefit from the strength in fixed income trading in Q1, with over half (55%) of its 2008 underlying revenues generated in these markets; the Lehman acquisition increases the exposure to these revenue streams. We expect further credit market write-downs and impairment (£2.5bn in 2009E after £6.6bn in 2008) but our profit estimates do not currently assume any gains on the fair value of own debt to counter the write-downs. It remains difficult to predict confidently investment bank profits, particularly given continued weak credit markets, but our conclusion based on Q1 trading is that there is evident upside risk to 2009E Bar Cap estimates.
The Barclaycard US credit card book has increased from US$1.4bn in 2004 to US$11.4bn at end 2008, and is now a material component of Barclaycard at roughly half the size of the UK card book. Our estimates assume an increase in loan impairment from 5.9% in 2008 to 9.0% in 2009E. Both ratios are broadly in-line with competitors’ experience and guidance, though we note that each quarter tends to bring revised guidance for higher losses, and so there remains downside risk to Barclaycard estimates in our view. We expect Barclaycard impairment (UK and International) to double this year to £2.2bn, representing 25% of the group impairment charge.
AGM is 23rd April and Q1 trading update (IMS) is 7th May.
Barclays Capital will benefit from the strength in fixed income trading in Q1, with over half (55%) of its 2008 underlying revenues generated in these markets; the Lehman acquisition increases the exposure to these revenue streams. We expect further credit market write-downs and impairment (£2.5bn in 2009E after £6.6bn in 2008) but our profit estimates do not currently assume any gains on the fair value of own debt to counter the write-downs. It remains difficult to predict confidently investment bank profits, particularly given continued weak credit markets, but our conclusion based on Q1 trading is that there is evident upside risk to 2009E Bar Cap estimates.
The Barclaycard US credit card book has increased from US$1.4bn in 2004 to US$11.4bn at end 2008, and is now a material component of Barclaycard at roughly half the size of the UK card book. Our estimates assume an increase in loan impairment from 5.9% in 2008 to 9.0% in 2009E. Both ratios are broadly in-line with competitors’ experience and guidance, though we note that each quarter tends to bring revised guidance for higher losses, and so there remains downside risk to Barclaycard estimates in our view. We expect Barclaycard impairment (UK and International) to double this year to £2.2bn, representing 25% of the group impairment charge.
AGM is 23rd April and Q1 trading update (IMS) is 7th May.
BE:
Ok – cheers
11:43AM
BE:
Beyond the broker stuff …
BE:
Is there any RAW?
RAW is market chatter – information that has not been formally tested through traditional journalistic channels (PRs etc). The story might be complete rubbish, but if we believe there is some substance to it we will say so. Either way, Reader Beware.
BE:
For example, any more on that Shire rumour that was in the paper this morning?
NH:
Not really.
NH:
Rumours reached us yesterday that they’d been looking to put together a bid defence
NH:
But we understand there’s no discussions currently
NH:
and that its advisers Morgan Stanley always have a defence doc on the shelf, just in case
NH:
And the CEO’s apparently on holiday at the moment
NH:
so I can’t see there being any discussions
BE:
MOST’s joint shop with Deutsche I think
BE:
Have the shares come off much?
NH:
no, they are up onthe day
NH:
small but they are up
NH:
5p better at 871p
BE:
That’s after 5% yesterday.
BE:
Bit surprised at that, to be honest.
NH:
Why?
BE:
Well, there’s a note from Merrill Lynch in circulation
BE:
talking about Adderall XR prescriptions getting whacked a fortnight after the generic being launched
BE:
Erosion worse than the market expects, it says
NH:
You got the piece?
BE:
Sure
BE:
Daily Rx data shows 39% erosion in 1st 13 days
We provide an update of US ADHD market shares using daily prescription 14th April from IMS for Shire’s Adderall XR (AXR) and Vyvanse. The data provides a lead indication on weekly data expected next Monday for week ending 10th April. The data show that AXR’s share of the ADHD market has suffered a 39% erosion in the first 13-days since the launch of Teva’s generic version on 2 April 2009 but that Vyvanse Rx growth remains unaffected. Although too early in the generic launch to make a clear call, the data is not inconsistent with our current forecasts of a 70% erosion in AXR market share for in 2Q09 and a 1% increase in Vyvanse share which yield a combined FY09 AXR/Vyvanse sales forecast c$100m below current consensus. Although the early erosion data are also within the scope of consensus forecasts, we remain concerned over the potential for downside to consensus 09E EPS; hence our Underperform rating.
We provide an update of US ADHD market shares using daily prescription 14th April from IMS for Shire’s Adderall XR (AXR) and Vyvanse. The data provides a lead indication on weekly data expected next Monday for week ending 10th April. The data show that AXR’s share of the ADHD market has suffered a 39% erosion in the first 13-days since the launch of Teva’s generic version on 2 April 2009 but that Vyvanse Rx growth remains unaffected. Although too early in the generic launch to make a clear call, the data is not inconsistent with our current forecasts of a 70% erosion in AXR market share for in 2Q09 and a 1% increase in Vyvanse share which yield a combined FY09 AXR/Vyvanse sales forecast c$100m below current consensus. Although the early erosion data are also within the scope of consensus forecasts, we remain concerned over the potential for downside to consensus 09E EPS; hence our Underperform rating.
BE:
(Will skip the noodly stuff in the middle …)
BE:
Maintain Underperform
We maintain our Underperform rating on Shire, due to ongoing risk to consensus 09E forecasts. Our 09E EP ADS of $2.62 remains below management guidance of $2.76-$3.14 and consensus of c$3.00, with key differences being: 1) AXR sales undergo typical generic erosion from April with sales of $496m vs. cons $562m; 2) Vyvanse sales of $512m vs. cons $546m; 3) Gross margins (GM) fall c150bp due to loss of high-margin AXR sales vs. consensus expectation of flat GM; 4) Depreciation of $102m vs consensus of $92m due to ongoing high capex spend into 09E and; 5) 4-6% SG&A and R&D growth vs. consensus of only 2-3%.
We maintain our Underperform rating on Shire, due to ongoing risk to consensus 09E forecasts. Our 09E EP ADS of $2.62 remains below management guidance of $2.76-$3.14 and consensus of c$3.00, with key differences being: 1) AXR sales undergo typical generic erosion from April with sales of $496m vs. cons $562m; 2) Vyvanse sales of $512m vs. cons $546m; 3) Gross margins (GM) fall c150bp due to loss of high-margin AXR sales vs. consensus expectation of flat GM; 4) Depreciation of $102m vs consensus of $92m due to ongoing high capex spend into 09E and; 5) 4-6% SG&A and R&D growth vs. consensus of only 2-3%.
NH:
thanks for that
11:46AM
NH:
Anything else you want to look at?
BE:
Well, on a macro view
BE:
There’s quite an interesting bit of research from the currency desk at BarCap
BE:
Arguing that this may be a bit more than a bear market rally
BE:
Obviously it’s forex focused but the conclusions are pretty broad
BE:
I’ll just jump to the last par
BE:
The most important debate in the market at the moment is whether the recent advance of risky assets is just another bear market rally. In our view, there are important differences between the current rally and other episodes since the beginning of the financial crisis. The fact that the current rally appears more broad-based, with more limited investor participation, and less dependent on repricing of the risk free rate implies the recent gains should be more durable. Although the scope for positive data surprises to support a further move up in risky assets seems limited, the removal of tail risk and the tempering of volatility suggest that, in the absence of event risks, a large correction to the current rally is a low probability occurrence.
NH:
Ok. Is there any more on that?
BE:
Sure. There’s “six key stylized facts”
BE:
Fact 1: At first sight, there are some similarities between the recent advance of risky assets and the false rally during December 2008-January 2009
There have been four major risk rallies since 2008 (Figure 1). The current episode has the most in common with the December 2008-January 2009 rally in terms of size and duration. Both rallies produced similar outsized gains in equity markets (about 25% returns for S&P 500). The December 2008-January 2009 rally lasted 33 days and the current one has gone on for 27 days so far. Credit spreads tightened by a similar margin (280bp and 300bp, respectively). In both cases, the USD declined (although the USD’s fall has been less pronounced in the current rally).
There have been four major risk rallies since 2008 (Figure 1). The current episode has the most in common with the December 2008-January 2009 rally in terms of size and duration. Both rallies produced similar outsized gains in equity markets (about 25% returns for S&P 500). The December 2008-January 2009 rally lasted 33 days and the current one has gone on for 27 days so far. Credit spreads tightened by a similar margin (280bp and 300bp, respectively). In both cases, the USD declined (although the USD’s fall has been less pronounced in the current rally).
BE:
Fact 2: However, the differences between them are more striking
Several major differences stand out. One, although Treasury yields fell during both rallies, their decline in the December 2008-January 2009 episode was much more dramatic (56bp for 10y Treasuries versus just 7bp for the current rally so far). The fact that the current rally in risky assets appears to be less dependent on the repricing of the risk-free rate may imply a more sustainable recovery.
Several major differences stand out. One, although Treasury yields fell during both rallies, their decline in the December 2008-January 2009 episode was much more dramatic (56bp for 10y Treasuries versus just 7bp for the current rally so far). The fact that the current rally in risky assets appears to be less dependent on the repricing of the risk-free rate may imply a more sustainable recovery.
BE:
Two, given the problems of the housing markets and that banks are the chief culprits of the financial crisis, it is reasonable to think that they should lead any general recovery in risky assets. The December 2008-January 2009 rally experienced massive outperformance of the real estate sector but bank shares underperformed noticeably. In the current rally, bank shares have been the big winners (S&P 500 banking index is up 65% since the rally began) and the real estate sector has kept up with the general markets. The fact that the current rally seems to be more broad-based also inspires more confidence in its durability.
Three, the performance of the hedge fund community varied significantly between the two rallies. Whereas macro hedge funds profited from the December 2008-January 2009 rally (+2%), they have recorded negative returns in the current episode (-4%). This reinforces the consensus that the macro hedge fund community was short risk in the beginning of March and that short covering probably drove a bigger part in the current rally. The fact that macro hedge fund returns have been flat over the past two weeks would also suggest that although hedge funds are no longer short risk, they are probably not long either.
BE:
Fact 3: Investors have adopted a more pro-growth bias but it is not clear whether positioning has become crowded
While the consensus view is that investor participation in the latest rally is limited, evidence suggests clearly that market positioning has adopted a general pro-growth bias. We transform the non-commercial positions of 40 major futures contracts (as a share of open interests) in terms of percentiles of the ranges of these positions over the past 52 weeks. Figure 2 shows the ranking of these percentiles for 12 contracts (a high number means the positioning is greater than the average over the past year).
Figure 2 suggests that the general speculative investment community is probably now long equities, long EUR, and betting on curve steepening (long 2y Treasuries and short 10y Treasuries). It is relatively neutral when it comes to copper, the USD, oil and short or under-weigh in GBP and CAD. Looking at the evolution of some of these positions gives us additional information. For example, the long position in the Dow has now reached the highest level since September 2008 before the Lehman bankruptcy (Figure 3). Long NZD positions have recovered to their July 2008 levels before the big sell-off in carry trades (Figure 4).
While the consensus view is that investor participation in the latest rally is limited, evidence suggests clearly that market positioning has adopted a general pro-growth bias. We transform the non-commercial positions of 40 major futures contracts (as a share of open interests) in terms of percentiles of the ranges of these positions over the past 52 weeks. Figure 2 shows the ranking of these percentiles for 12 contracts (a high number means the positioning is greater than the average over the past year).
Figure 2 suggests that the general speculative investment community is probably now long equities, long EUR, and betting on curve steepening (long 2y Treasuries and short 10y Treasuries). It is relatively neutral when it comes to copper, the USD, oil and short or under-weigh in GBP and CAD. Looking at the evolution of some of these positions gives us additional information. For example, the long position in the Dow has now reached the highest level since September 2008 before the Lehman bankruptcy (Figure 3). Long NZD positions have recovered to their July 2008 levels before the big sell-off in carry trades (Figure 4).
BE:
Fact 4: Cumulated positive data surprises have reached extreme levels
The recent rally in cyclical assets has been supported by better-than-expected economic data in the past month (which have helped reduce concerns about fat-tail downside risk to growth). This was especially the case with US data. Our data surprise index shows that the cumulated positive surprises for US activity data releases rose steadily through March and is standing at its highest level since early 2007 (Figure 5). The last time we saw such a sustained stretch of strong economic data was back in July to August 2008. The peaking of our data surprise index in August coincided with the peak of a mini rally in risky assets that began in July. Whether this pattern will play out again this time around is not clear, but certainly the scope of positive data as a catalyst for a further move up in cyclical assets is more limited in the near term.
The recent rally in cyclical assets has been supported by better-than-expected economic data in the past month (which have helped reduce concerns about fat-tail downside risk to growth). This was especially the case with US data. Our data surprise index shows that the cumulated positive surprises for US activity data releases rose steadily through March and is standing at its highest level since early 2007 (Figure 5). The last time we saw such a sustained stretch of strong economic data was back in July to August 2008. The peaking of our data surprise index in August coincided with the peak of a mini rally in risky assets that began in July. Whether this pattern will play out again this time around is not clear, but certainly the scope of positive data as a catalyst for a further move up in cyclical assets is more limited in the near term.
BE:
Fact 5: Our model suggests that the likelihood of the current rally being immediately followed by a big correction is not high
In the past few weeks, there has been a significant reduction in the perceived tail risk associated with the prospects of the banking industry, emerging markets, and the global economy. This has helped temper the level of uncertainty in asset markets, as evidenced by a sharp decline in implied volatilities across asset classes.
In recent weeks, the BarCap Carry Unwind Risk Index has been signalling that the probability of a sharp sell-off in FX carry trades has moderated to its lowest level since the start of the financial crisis (Figure 6). The index is based on a statistical model that uses market risk conditions, the market price of risk, comovement of asset prices, and speculative positioning to predict the likelihood of a large correction of FX carry trades in the coming four weeks. While the index cannot predict whether the rally in risk will continue, it does suggest that, in the absence of unforeseen event risks, the likelihood of the current rally being immediately followed by a big correction is small.
In the past few weeks, there has been a significant reduction in the perceived tail risk associated with the prospects of the banking industry, emerging markets, and the global economy. This has helped temper the level of uncertainty in asset markets, as evidenced by a sharp decline in implied volatilities across asset classes.
In recent weeks, the BarCap Carry Unwind Risk Index has been signalling that the probability of a sharp sell-off in FX carry trades has moderated to its lowest level since the start of the financial crisis (Figure 6). The index is based on a statistical model that uses market risk conditions, the market price of risk, comovement of asset prices, and speculative positioning to predict the likelihood of a large correction of FX carry trades in the coming four weeks. While the index cannot predict whether the rally in risk will continue, it does suggest that, in the absence of unforeseen event risks, the likelihood of the current rally being immediately followed by a big correction is small.
BE:
Fact 6: There is no evidence that EUR/JPY leads equities
EUR/JPY and the global stock markets have been moving in lockstep in recent years (Figure 7). Moreover, there is a widely held belief in some quarters that EUR/JPY has a tendency to lead the stock markets, although there is no agreement as to why.
EUR/JPY and the global stock markets have been moving in lockstep in recent years (Figure 7). Moreover, there is a widely held belief in some quarters that EUR/JPY has a tendency to lead the stock markets, although there is no agreement as to why.
Statistical tests for causality do not lend support to this view. Figure 8 presents the results of the Granger Causality Tests for daily returns of EUR/JPY and MSCI-World. The two null hypotheses being tested are whether the MSCI does not cause EUR/JPY and whether EUR/JPY does not cause MSCI. The hypothesis that MSCI does not cause EUR/JPY can be rejected in the full sample and the sub sample since 2007. On the other hand, we are able to reject the hypothesis that EUR/JPY does not cause MSCI only in the period since 2007. These results strongly suggest that there is no clear casual relationship between EUR/JPY and equity markets. In this regard, the fact that EUR/JPY’s recent rise appears to be running out of momentum does not necessarily augur poorly for equities.
BE:
Worth reading that, IMHO
BE:
I’ll seek to Long Room that if anyone’s interested in seeing all the charts.
NH:
Good idea
11:50AM
NH:
right, what else shall we look at?
NH:
Cazenove note around on Taylor Wipeout
BE:
Oh yeah
NH:
reckon the houseseller will look to take advantage of the recent tick up in its share price to launch a rights issue
NH:
now that would be an interesting test of sentiment
NH:
and there is a long list of companies, I hear, waiting to do the same thing
NH:
with underwriting capacity freed up – post HSBC and Xstrata – there could be a flood of these
NH:
here’s Caz on Wipeout
NH:
In this note we look at how Taylor Wimpey’s proposed new debt structure may lead to attractive
outcomes for investors, should it be approved at the two bondholder meetings scheduled for 30
April 2009.
In our view the proposed new debt structure incentivises the Group to raise equity at the earliest
opportunity, which would allow the Group the operational freedom to maximise the value of its
existing landbank, augment its landbank should value opportunities arise and save significant
interest costs.
outcomes for investors, should it be approved at the two bondholder meetings scheduled for 30
April 2009.
In our view the proposed new debt structure incentivises the Group to raise equity at the earliest
opportunity, which would allow the Group the operational freedom to maximise the value of its
existing landbank, augment its landbank should value opportunities arise and save significant
interest costs.
NH:
If the Group raises at least £350m it could reduce its cash interest charge by up to 300bp,
saving up to £70m pa
saving up to £70m pa
NH:
If the Group meets the planned facility reductions it would walk away from cash interest charge
commitments of £135m pa from June 2009, £260m pa from 30 June 2010 and £340m pa
from 31 December 2010.
commitments of £135m pa from June 2009, £260m pa from 30 June 2010 and £340m pa
from 31 December 2010.
NH:
Our base case assumes that £350m is raised at 25p per share and that UK land is written down
to £28,000 per plot, our estimate of trough land prices, which leads to a post rights issue
FY2009E NAV of 57p and a price to book valuation of 0.63x a c.30% discount to its peers
(assuming a TERP of 36p).
to £28,000 per plot, our estimate of trough land prices, which leads to a post rights issue
FY2009E NAV of 57p and a price to book valuation of 0.63x a c.30% discount to its peers
(assuming a TERP of 36p).
NH:
The amended financing package will provide the Group with committed facilities until July 2012
and the covenants held firm when subjected to peak to trough house price falls of 3035% and
sales rates 50% below the level experienced in the first 13 weeks of 2009.
and the covenants held firm when subjected to peak to trough house price falls of 3035% and
sales rates 50% below the level experienced in the first 13 weeks of 2009.
NH:
In our view the Group’s debt could be reduced further by the disposal of the North American
operations, an outcome, which will look, to us, more likely should the recently announced Pulte –
Centex merger complete.
operations, an outcome, which will look, to us, more likely should the recently announced Pulte –
Centex merger complete.
Taylor Wimpey (TW:LSE): Last: 52.00, up 0.75 (+1.46%), High: 53.00, Low: 50.50, Volume: 3.60m
BE:
Some interesting numbers in there
11:53AM
NH:
Right, Sam has just pubbed an interesting post
NH:
IMF have released two chapters from their latest global outlook
NH:
and it is pretty bearish
NH:
if the G20 does everything right
NH:
then the recovery should start in
NH:
wait for it
NH:
2011
NH:
just getting the link to the report
BE:
Waiting …
NH:
sorry just looking at this
NH:
these are the best quotes according to Sam
NH:
The global economy is experiencing the deepest downturn in the post–World War II period, as the financial crisis rapidly spreads around the world. A large number of advanced economies have fallen into recession, and economies in the rest of the world have slowed abruptly. Global trade and financial flows are shrinking, while output and employment losses mount. Credit markets remain frozen as borrowers are engaged in a drawn-out deleveraging process and banks struggle to improve their financial health. Many aspects of the current crisis are new and unanticipated. Uniquely, the current disruption combines a financial crisis at the heart of the world’s largest economy with a global downturn.
NH:
… recessions associated with financial crises tend to be unusually severe and their recoveries typically slow. Similarly, globally synchronized recessions are often long and deep, and recoveries from these recessions are generally weak. Countercyclical monetary policy can help shorten recessions, but its effectiveness is limited in financial crises. By contrast, expansionary fiscal policy seems particularly effective in shortening recessions associated with financial crises and boosting recoveries. However, its effectiveness is a decreasing function of the level of public debt. These findings suggest the current recession is likely to be unusually long and severe and the recovery sluggish.
NH:
A recession began in the United States in August 1929. A tightening of monetary policy during the previous year, aimed at stemming stock market speculation, is widely seen as the initial cause. The stock market crashed in October 1929, which prompted a sharp decline in consumption, partly because of increased uncertainty about future income.
NH:
The recession intensified and turned into a depression over the course of 1931–32. Pernicious feedback loops between the financial sector and the real economy emerged, leading to entrenched debt deflation and four waves of bank runs and failures between 1930 and 1933. Private consumption and investment contracted sharply.
NH:
Despite the differences in mechanics, the effects on the behavior of financial intermediaries are similar. Funding problems have led to balance sheet contraction (deleveraging), fire sales of assets (adding to downward pressure on prices), increased holdings of liquid assets, and decreased lending (or holdings of risky assets) as a share of total assets. Moreover, with today’s highly interconnected financial system, there has been gridlock because of network effects in a world of multiple trading and large gross positions. The ultimate effects of these financial factors on the real economy are similar in the two episodes.
NH:
here is continued pressure on asset prices, lending remains constrained by financial sector deleveraging and widespread lack of confidence in financial intermediaries, financial shocks have affected real activity on a global scale , and inflation is decelerating rapidly and is likely to approach values close to zero in a number of countries. Moreover, declining activity is beginning to create feedback effects that affect the solvency of financial intermediaries, which risks of debt deflation have increased.
NH:
Sam’s post will be up in a moment
BE:
Ok
11:58AM
NH:
Ok, it is almost midday
NH:
what shall we finish up with
BE:
We should revisit that Compass d/g mentioned above …
BE:
Biggest FTSE faller after all
Compass Group (CPG:LSE): Last: 331.50, down 13.25 (-3.84%), High: 343.00, Low: 328.25, Volume: 9.14m
NH:
Compass Group – Opportunity for profit taking/rotation [CPG.L CPG LN], 345p, OUTPERFORM, Sector – Neutral
While we remain positive on the medium term outlook for Compass Group, we believe that there are several reasons either to take profits, or for investors looking for greater exposure to consumer cyclicals to rotate out of Compass.
While we remain positive on the medium term outlook for Compass Group, we believe that there are several reasons either to take profits, or for investors looking for greater exposure to consumer cyclicals to rotate out of Compass.
NH:
First, the strength of the US Dollar and of the Euro have both been significant factors contributing to earnings growth forecast for Compass. We estimate that 50% of Compass’ EBIT is US Dollar denominated and 26% is Euro denominated. In H1 2009E, for example, we forecast a £107m increase in EBIT YoY, to £429m, of which c. £70m is a consequence of foreign exchange translation benefits.
However, as shown in figures 1 and 2 below, while the weakness of Sterling against these currencies appears to have been a significant driver of relative share price for some time, in the past two weeks Compass’ relative share price outperformance (vs the FTSE All-Share) has been strong despite the strengthening of Sterling. It is also apparent from figures 1 and 2 that when this disparity has occurred in recent months (eg February), it has been followed by share price underperformance.
Further, our forecasts for 2010E are predicated on a US Dollar rate of 1.45 and a Euro rate of 1.1; consequently, using spot rates would lead to a small downgrade to our forecasts (-2%).
However, as shown in figures 1 and 2 below, while the weakness of Sterling against these currencies appears to have been a significant driver of relative share price for some time, in the past two weeks Compass’ relative share price outperformance (vs the FTSE All-Share) has been strong despite the strengthening of Sterling. It is also apparent from figures 1 and 2 that when this disparity has occurred in recent months (eg February), it has been followed by share price underperformance.
Further, our forecasts for 2010E are predicated on a US Dollar rate of 1.45 and a Euro rate of 1.1; consequently, using spot rates would lead to a small downgrade to our forecasts (-2%).
NH:
Second, we are cautious ahead of Aramark’s Q2 results (the number three player after Compass and Sodexo) given the relatively weak trading which Aramark reported for Q1. (Aramark has yet to announce its results date but we anticipate that this will be in the fortnight before Compass’ H1 results on 13 May.)
In Q1, Aramark’s operating margin fell c. 43bps YOY in catering and facilities management (before central costs). In our view, this raised concerns regarding contract caterers’ operational gearing and their ability to withstand the impact of slowing volumes (ie throughput on catering contracts).
While Compass forecasts a margin increase of 50bps in the first half, and we expect Compass’ trading to continue to outperform Aramark’s, any further weakness at Aramark is likely to have an adverse impact on sentiment towards the sector in our view.
Third, we highlight that Compass’ relative share price performance is now very close to the top of the range within which it has traded since the full year 2008 results in December 2008.
In Q1, Aramark’s operating margin fell c. 43bps YOY in catering and facilities management (before central costs). In our view, this raised concerns regarding contract caterers’ operational gearing and their ability to withstand the impact of slowing volumes (ie throughput on catering contracts).
While Compass forecasts a margin increase of 50bps in the first half, and we expect Compass’ trading to continue to outperform Aramark’s, any further weakness at Aramark is likely to have an adverse impact on sentiment towards the sector in our view.
Third, we highlight that Compass’ relative share price performance is now very close to the top of the range within which it has traded since the full year 2008 results in December 2008.
NH:
Notwithstanding our caution in the short term, we believe that Compass remains an attractive long-term defensive play, in particular given continued uncertainty on the economic outlook and the sustainability of the current market rally. We believe it benefits from a defensive spread of revenue streams, good structural growth prospects, a strong balance sheet and a progressive dividend. It currently trades on a 2009E PER of 12.5x (compared with Sodexo on 14.8x [EXHO.PA, SW FP, N/R, €36.37]), which also suggests to us that it can participate in a re-rating of the wider market. In addition, the equity risk premium to reach the current share price in our DCF model (which assumes a 1% terminal growth rate) is 8.5%.
NH:
(thanks Itzman)
NH:
right, I thinnk we are done
NH:
unless, you feel that Citi note on the commods is worth a look at
BE:
Personally, no.
BE:
I’m knackered from doing this all week.
NH:
Ok. i think we are done then
NH:
let’s hope things pick up next
NH:
been so quite here in the City this week
NH:
not many people are around
BE:
Indeed
BE:
All very flat
BE:
Fitz – we’ll see what we can do
NH:
not sure I have ever seen Paul called wild and passionate
NH:
Itzman
NH:
he has been called a couple of other things
NH:
but never that
NH:
right, due to popluar demand here is the mining note
NH:
Commodity Heap: We are not out of the woods yet
* Resurgent optimism – Base metal prices are rebounding strongly, up 40%
from the February lows. Copper is leading the way, rocketing 66%, 17% in
the last two weeks. In the light of this resurgent optimism it’s
instructive to review the latest demand indicators.
* Early indicators still bearish – It’s still too early for
comprehensive data on demand this year but our micro-indicators are all
still strongly negative, even the second derivative is still negative.
NH:
* China is the key (once again) – China buying is the locomotive behind
this rally, especially of copper.
this rally, especially of copper.
* Speculative buying – Speculative buying, both short covering and new
buying (Figure 2, Figure 5) is adding to the upward price momentum.
* US demand plummets – Latest data (for February) shows US demand is
plummeting still further. Copper shipments are down 40% yoy, 20% mom
(Figure 13). Aluminium shipments and orders are down a similar amount
(Figure 27).
* Japan is worse – February copper shipments fell 45% yoy, 12% mom
(Figure 15).
NH:
* Europe is terrible – Merchant premia are the best micro indicator
here. Copper premia are the lowest since 2002 (Figure 14), aluminium the
lowest since 1993 (Figure 28).
here. Copper premia are the lowest since 2002 (Figure 14), aluminium the
lowest since 1993 (Figure 28).
* In China the situation is more mixed – Copper cathode imports have
surged exceeding the early 2007 peak (Figure 36) but total copper
imports are up more modestly as scrap and concentrate imports fall
(Figure 36).
* Is it sustainable? Probably not – Cathode imports are being driven by
a shortage of scrap, stock building and SRB buying, and is probably well
ahead of demand.
* SRB wild card – Buying by the State Reserve Bureau is the main
uncertainty. Purchases to date are estimated at 200-300kt. Normal
behavior would indicate that they would stop buying at ~US$1.30/lb.
NH:
right we are done
NH:
Wild man Murphy is back next week
BE:
wild and passionate Paul …
NH:
oh,
BE:
!
NH:
Hargreaves Landsdown
BE:
!!!
NH:
looks like some of the founders are selling
NH:
post the decent results
BE:
“The Aldi of investment products” as someone downstairs called them yesterday. (Taxloss I think)
NH:
looks like Lansdown is selling because he needs the cash for Bristol City Football Club
NH:
tephen Lansdown (the “Selling Shareholder”) announces that he intends to sell
at least 15 million ordinary shares in Hargreaves Lansdown plc (the “Shares”)
out of his current shareholding of 132 million shares. Following the sale
Stephen has no current intention to sell further shares prior to the
announcement of Hargreaves Lansdown Plc’s preliminary results for the year
ending 30 June 2009.
at least 15 million ordinary shares in Hargreaves Lansdown plc (the “Shares”)
out of his current shareholding of 132 million shares. Following the sale
Stephen has no current intention to sell further shares prior to the
announcement of Hargreaves Lansdown Plc’s preliminary results for the year
ending 30 June 2009.
Monies raised from the sale will be used to help fund private projects including
the proposed new stadium for Bristol City Football Club of which Stephen
Lansdown is Chairman.
The share sale will be completed by way an accelerated bookbuilt secondary
placing (the “Placing”). Citigroup Global Markets U.K. Equity Limited (“Citi”)
and Numis Securities Limited (“Numis”) are acting as joint global co-ordinators
and bookrunners.
The sale price will be determined and announced after closing of the accelerated
bookbuilding process. The timing of closing of the bookbuilding process will be
determined in due course by Citi and Numis.
NH:
and Citi have downgrade as well today
NH:
saying stock is now expensive
BE:
Give us a reading on the stock then
NH:
down 10% at the moment
NH:
off 22.5p at 204.5p
NH:
more people/companies taking advantage of the bear market rally to sell
NH:
are Britsol City on course for promotion or something?
NH:
is that why he needs the cash?
NH:
in fact what league are they in
BE:
Fighting for a play-off berth apparently
NH:
there’s two clubs in Bristol
BE:
Just pulling up their website …
NH:
Bristol City are in the Championship
NH:
and outside chance of getting in to the play offs
NH:
nine points adrift
NH:
but only three fixture left
BE:
Swansea, Sheffield and Burnley
BE:
All six pointers
BE:
Probably
NH:
looks very outside
NH:
anyway, the cash is needed from stadium
BE:
Leaving historic Ashton Gate?
BE:
Well I never.
NH:
I wonder how many more shares he will be forced to sell to finance his footie fantasy
NH:
and here is the Citi note
NH:
FYI
NH:
Hargreaves Lansdown (HRGV.L; £2.27; 2M)
Cutting to Hold on valuation grounds
Cutting to Hold on valuation grounds
NH:
Positive IMS on AUA and revenues – Hargreaves Lansdown’s Q3 IMS showed
Assets Under Administration (AUA) increasing 3% qoq to £10.2bn, a 6%
beat vs our forecast. Q3 revenues of £32.8m was also 11% higher than our
projection. The cause of the beat was partly Vantage AUA being more
resilient than expected and partly revenue margin on cash holding constant
qoq. A strong fall-off in the latter is already modeled for FY2010.
Strong performer into Q3s – The share had been a strong performer into this
statement, up 40% ytd. As such, the market was expecting a positive
update.
Defensive attractions remain – We are not convinced about the sustainability
of the current index rise and believe that market flow confidence remains
fragile. In this context, HL’s defensive attributes of sustained inflows, sticky
assets, and strong balance sheet continue to appeal
Assets Under Administration (AUA) increasing 3% qoq to £10.2bn, a 6%
beat vs our forecast. Q3 revenues of £32.8m was also 11% higher than our
projection. The cause of the beat was partly Vantage AUA being more
resilient than expected and partly revenue margin on cash holding constant
qoq. A strong fall-off in the latter is already modeled for FY2010.
Strong performer into Q3s – The share had been a strong performer into this
statement, up 40% ytd. As such, the market was expecting a positive
update.
Defensive attractions remain – We are not convinced about the sustainability
of the current index rise and believe that market flow confidence remains
fragile. In this context, HL’s defensive attributes of sustained inflows, sticky
assets, and strong balance sheet continue to appeal
NH:
Gearing to market recovery may be milder than anticipated – If we are wrong
and this is a convincing recovery we would highlight that HL should initially
experience a negative revenue margin effect, offsetting some AUA growth.
Customers are likely to quickly switch from cash products to funds and
equities which carry lower revenue margins, depressing profit growth.
Valuation multiple now looking pretty full – We increase our forecast EPS for
09 and 2010 by 3%. Including this the stock is trading at ~22x cal 09E PE.
We believe this multiple now looks pretty full, unless the market recovery
really takes hold. On valuation grounds, we downgrade to Hold, with a new
target price of 225p.
and this is a convincing recovery we would highlight that HL should initially
experience a negative revenue margin effect, offsetting some AUA growth.
Customers are likely to quickly switch from cash products to funds and
equities which carry lower revenue margins, depressing profit growth.
Valuation multiple now looking pretty full – We increase our forecast EPS for
09 and 2010 by 3%. Including this the stock is trading at ~22x cal 09E PE.
We believe this multiple now looks pretty full, unless the market recovery
really takes hold. On valuation grounds, we downgrade to Hold, with a new
target price of 225p.
NH:
actually, that might have been out yesterday
BE:
Shop broker. Hm.
NH:
OK, let’s wind thing up
BE:
Yup.
NH:
quick FTSE 100 update
NH:
42 points at 4,094
NH:
and the take profit advice in Lloyds is not working
NH:
stock through 100p at the moment
NH:
14.7% at 102.6p
NH:
will try and find out, what is going on
NH:
financials all moving
NH:
Aviva up 10.3%
NH:
barc almost 230p
NH:
RBS 30p
BE:
You got a Frankfurt quote for Citi?
BE:
Up 3.25% at 3.18e
NH:
of course, trading in Citi has been very sqeezy of late, due to PB’s recalling stock
NH:
hedgies has shorted the ords
NH:
and were going to cover it with prefs
NH:
which will convert at some point
NH:
although nobody is sure when
BE:
Wouldn’t trust the German quote as indication of anything, frankly …
BE:
And on that note, have a good weekend
NH:
cya